Barry Ritholtz is celebrating Michael Jackson's acquittal more than most, because it corroborates his view that prediction markets can be wrong; Intrade bettors were backing a guilty verdict on the charge of supplying alcohol to minors.
However, Barry is swimming against a strong tide here. There's lots of evidence (gathered superbly by Chris Masse) that information markets can be great predictors - for example, this presentation (powerpoint). They embody the wisdom of crowds.
This raises a question: can we get a list of conditions under which betting markets are or are not accurate predictors?
I'll kick off with two possibilities.
First, markets work best at aggregating dispersed information. This condition failed in the Jackson case because the information came from just one source - the courtroom. But the condition held in the UK and US elections, where betting markets were more successful.
Second, markets can fail to account for individual quirks or eccentricities. They therefore work best at predicting the opinions of crowds (for example general election results where such quirks cancel out) than small groups. As Chris Masse put it in a comment on Barry's post: "Events whose outcomes are determined in a conclave by sequestrated jury members are among the hardest to divine."
Can we add to this list? And if betting markets are as good at predicting things as their advocates suggest, why do share prices so often seem systematically wrong*? Why are gamblers smart but investors stupid? Is the short sales constraint a sufficient explanation?
* For example, in the last 12 months Shell has out-performed Royal Dutch by 5.8 percentage points. They are the same company.